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Can Johnson & Johnson Keep Growing Healthier?

Investors have high expectations for the healthcare conglomerate.

Most people know healthcare giant Johnson & Johnson (NYSE:JNJ) because of the over-the-counter brands that they have in their medicine cabinets. Yet even though Tylenol, Band-Aid, and other consumer products help drive brand awareness, Johnson & Johnson has a much larger role in the pharmaceutical and medical devices markets, and the drug business in particular has been the biggest growth driver in recent years.

As investors prepare for Tuesday's third-quarter financial report from Johnson & Johnson, they want to see whether the company can keep producing the growth in revenue and earnings that they've come to expect. Let's take an early look at what's been happening at Johnson & Johnson and whether it can build up more positive momentum going forward.

Stats on Johnson & Johnson

Expected EPS Growth

10.7%

Expected Revenue Growth

3.6%

Forward Earnings Multiple

16.6

Expected 5-Year Annualized Growth Rate

6.5%

Data source: Yahoo! Finance.

What's ahead for Johnson & Johnson earnings?

In recent months, investors have been more excited about the prospects for better earnings from Johnson & Johnson, boosting their full-year 2016 and 2017 projections by $0.08 to $0.10 per share. Yet the stock hasn't done anything for shareholders lately, falling 4% since July.

Johnson & Johnson's second-quarter results created modest enthusiasm about the healthcare conglomerate's future prospects. The company boosted its sales by nearly 4% from the year-ago quarter, and adjusted earnings also managed to climb modestly and satisfy investors who were bracing for a flat performance from J&J. Currency pressures continued to weigh on the international business, but strength in the U.S. helped to offset those downward impacts, and the pharmaceutical division remained the key driver of growth for Johnson & Johnson. The company also boosted its sales and earnings guidance for 2016, citing hopes that significant clinical milestones in its pipeline of candidate drugs could help push results upward even further in the long run.

How J&J sees better times ahead

New products are an important driver of growth for Johnson & Johnson, and the company has high hopes for some of its more recent offerings. The research that J&J is doing to come up with oncology treatments has been highly successful, with sales rising at a 25% to 30% year-over-year rate during the first half of 2016. Further candidate drugs within the pipeline also take aim squarely at cancer, and with a mix of treatments that serve large populations more effectively than competing drugs as well as those serving small populations for which previous treatments have been unavailable, Johnson & Johnson expects oncology to keep gaining in importance.

At the same time, Johnson & Johnson is trying to serve the growing market for those with diabetes. The company's OneTouch Via insulin delivery device should see its launch within the next 12 months, and it caters to the demand among diabetics to have a discreet way of getting the insulin they need without the hassle of injections. Without competition for the moment, J&J has an ability to make the most of the first-mover opportunity.

More broadly, one thing that Johnson & Johnson is always looking to do is to focus its business on the areas with the highest potential for strengthening its leadership position in the industry. That involves both selling off slower-growth businesses and looking for strategic acquisitions that can bulk up its competitive position in emerging growth industries. For instance, in September, J&J bought the Abbott Medical Optics eye-surgery equipment unit of Abbott Laboratories (NYSE:ABT), paying $4.3 billion to strengthen its overall medical device lineup. At the same time, with the unit's eye drop and solutions business adding to its Lasik and cataract procedure equipment, Johnson & Johnson will be able to integrate the purchase with its Acuvue contact lens business to strengthen exposure to a market expected to grow at a solid 5% annual pace over the next four to five years. The move shows that even if J&J has been more conservative in sizing its acquisitions than some of its pharma peers, it still makes moves that take it in the right direction.

In the Johnson & Johnson earnings report, investors will want to keep a close eye not only on whether the pharmaceutical business continues to take the lead in producing growth but also on the contributions that the medical device and consumer segments are able to make to its overall success. In order to make dramatic gains, Johnson & Johnson will need all of its major businesses pulling their weight to produce the growth that investors really want to see from the company going forward.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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